More About Robert Tannenwald

Robert Tannenwald

Robert Tannenwald is a Senior Fellow in the Center’s State Fiscal Project.

Full bio and recent public appearances | Research archive at CBPP.org


The Flawed “Evidence” for the Tax-Flight Myth

August 5, 2011 at 1:37 pm

As we explained yesterday, the claim that a state can’t boost revenues by raising taxes on upper-income people because they will just flee to lower-tax states is a myth.  Those who propagate it frequently cite statistics that can sound convincing but are fundamentally flawed.

Take Oregon, where in 2010 a business-backed study predicted that a recent tax increase on upper-income households would drive affluent taxpayers out of the state.  As evidence, the study claimed that Portland residents had been moving to nearby Washington State because it has no income tax.  But the study didn’t account for a local boom in Portland that had caused housing prices to rise faster there than in Washington.  Any migration was likely prompted by housing price differentials (and other factors) more than tax differentials.

Similarly, in New Jersey, policymakers and lobbyists were so determined to find a taxes-migration link that they cited a study that has nothing to do with taxes.  In 2010, Boston College’s Center on Wealth and Philanthropy issued a report on the impact of changing demographics on charitable giving in New Jersey.  It showed that starting in 2004, many more millionaires left New Jersey than moved to it, a sharp change from previous years.  Some, including Governor Chris Christie, blamed the change on the state’s 2004 tax increase on incomes over $500,000.

But these critics overlooked one big problem:  the study focused on people with a net worth of $1 million or more, most of whom had much less than $500,000 a year in annual income — which means the tax increase didn’t affect them.

A thorough study of the tax increase found that any “out-migration” it might have caused cost the state only around $16 million in tax revenue between 2004 and 2007, a drop in the bucket compared to the $3.8 billion in revenue the state gained from the tax increase over those years.

Finally, in Maryland, some have blamed the precipitous 2008 drop in the number of tax filers with incomes over $1 million on the “millionaire tax” that the state enacted that year.  “Millionaires flee Maryland taxes,” one headline blared.  But an examination of actual tax return data shows that the vast majority of this decline occurred not because people left the state, but because their incomes fell below $1 million due to the recession and stock market crash.  They remained on the Maryland tax rolls, but in a lower tax bracket.

The fact is, contrary to all the scare talk, raising taxes won’t spark a large migration out of a state, any more than cutting taxes will entice a big influx of people into a state.  Tax flight is a myth.

If You Tax Them, They WON’T Leave

August 4, 2011 at 1:02 pm

“Ladies and gentlemen, if you tax them, they will leave,” New Jersey Governor Chris Christie told state lawmakers last year in support of his proposed tax cuts.  Many elected officials, journalists, and commentators state as a truism that residents — especially wealthy ones — regularly flee from higher-tax states to lower-tax ones.  Only it’s not true, as our major new report explains.

This means that states struggling in a weak economy can raise taxes on the most affluent households to invest in education, health care, transportation and other job-creating tools and not worry about it backfiring.

More U.S. Families Now Leave Florida than Move to It

Here are the basic facts:

  • Migration is not common. Only about 30 percent of those born in the United States change their state of residence in their lifetimes.  And when people do relocate, a large body of scholarly evidence shows that they do so primarily for new jobs, cheaper housing, or a better climate.
  • The migration that’s occurring is much more likely to be driven by cheaper housing than by lower taxes. The difference between housing costs in two states is often many times greater than the difference in taxes.  So what might look like migration in search of lower taxes is really often migration for cheaper housing.The experience in Florida, often claimed as a state that attracts households because it has no income tax, tells the tale.  In the latter half of the 2000s, the previously rapid influx of people from other states into Florida slowed and then reversed.  What changed wasn’t Florida’s tax policies but rather its housing prices, which rose to the point where Northeasters had fewer opportunities to “trade up” by moving to Florida after selling their expensive homes.
  • Recent research shows income tax increases cause little or no interstate migration. Perhaps the most carefully designed study to date on this issue concerned the potential impact of New Jersey’s 2004 tax increase on filers with incomes exceeding $500,000.  It found that at most, 70 people might have left the state between 2004 and 2007 because of the tax increase.  Overall, the state gained much, much more revenue from the tax increase than it lost when these few dozen people left.Against this evidence, anti-tax advocates, policymakers, and journalists continue to rely on a few deeply flawed studies and incomplete anecdotes to back up the taxation-migration myth, as we’ll explain in a later post.
  • Low taxes can prevent a state from maintaining the kinds of high-quality public services that potential migrants value. While low taxes decrease the cost of living, they also mean that states have less revenue to finance public services.  The result?  Fewer people will be attracted to states that have not maintained such amenities.

We’re not saying that no one ever moves to a new state in order to pay less in taxes, but the evidence clearly shows that taxes aren’t a primary motivation for migrants and that whatever tax-related migration does occur has only a minimal impact on the amount of revenue a tax increase raises.  When taxes go up, the vast majority of people stay, and the state gains significant revenue for public needs.

State policymakers shouldn’t allow false claims to push them into unaffordable tax cuts or frighten them away from needed tax increases.

The Twilight of Film Tax Credits?

July 7, 2011 at 11:40 am

State governments have acted like swooning fans toward the film industry for years, handing out tax subsidies to attract movie and TV productions, but they’re finally starting to take a more critical look.  And they don’t like what they see:  since January, 17 states have eliminated their film subsidies or pared them back.

As I wrote last fall, policymakers are quite right to view film tax credits with a more skeptical eye.

For starters, film tax credits are expensive, costing states over $1.5 billion per year.  At a time when states are cutting funds for schools, cops, and health care to help close recession-induced budget shortfalls, it’s impossible to justify large subsidies for an already profitable industry.

Moreover, film tax credits haven’t lived up to their Hollywood hype.  The film industry claims that they create jobs for local residents, but the most serious study of this issue found that out-of-state specialists — actors, writers, cinematographers, and so on — reap a disproportionate share of the benefits.  Residents get relatively low-paying jobs that disappear once a shoot is finished and the producer leaves town.

These credits are bad long-term investments, too.  Their die-hard supporters say that a state can use the credits to cultivate its own permanent film industry with a local, skilled labor force — like Los Angeles or New York City — then do away with the credits once it no longer needs them to attract productions.  But states like New Mexico and Louisiana have tried that approach, offering generous film subsidies for almost a decade, and it has yet to pay off.  Film production is so mobile, and so risky financially, that producers will always tend to go to wherever they can get the biggest subsidies.

Now, states are starting to wise up:

  • New Mexico, once the avatar of generous film subsidies, has capped its subsidies at $50 million a year, an estimated 24 percent below last year’s level.
  • Michigan, which last year spent an estimated $135 million in film tax credits, is gradually replacing its credit with a $25 million grant. (It’s often easier to hold an employer accountable for results with a grant program than a tax credit.)
  • Washington State has eliminated its small film tax credit, a $7 million biennial program, in large part because lawmakers were swayed by independent evidence that film subsidies are ineffective engines of economic development.

A few states, like Florida, Utah, and Virginia, are still following the tired old script of expanding film subsidies.  But the evidence is clear:  the idea that film subsidies can generate growth is a bigger bust than “Battlefield Earth.”  By eliminating them, states can free up scarce funds for schools, worker training, infrastructure, and public safety — proven building blocks of jobs and income for families from all walks of life.

That’s not a blockbuster fantasy, but it is reality.

Five Reasons Why States Can’t Create Jobs by Cutting Business Taxes

April 28, 2011 at 11:30 am

Despite large budget shortfalls, states like Florida, Michigan, and New Jersey are considering new business tax cuts in the hope that this will generate job growth.  This strategy isn’t likely to work, for several reasons:

  1. States’ balanced-budget requirements mean that they will have to pay for this loss of tax revenue by raising taxes elsewhere or reducing services.  But if states have to cut way back in the number of teachers or cops on the beat or do without needed maintenance for roads and bridges, they’ll become less competitive.  Businesses aren’t attracted to states that lack services that they value, from good schools to well-maintained infrastructure.
  2. Businesses won’t hire new employees unless there is greater consumer demand for their goods and services.  Tax cuts for businesses won’t stimulate that demand.
  3. State and local business taxes constitute less than 2 percent of a firm’s costs, on average.  Trying to encourage employers to hire more workers by trimming this already-small cost further is akin to trying to wag a large dog by a very short tail.
  4. Many tax cuts are pure windfalls that reward businesses for doing what they would have done anyway.  That’s especially true for across-the-board cuts in business taxes.  But it’s also true for more narrowly tailored tax breaks that attempt to require a specific action, such as hiring more workers, because there is no practical way to prevent businesses from claiming the tax break if they would have made those hires anyway.
  5. States’ concerns that not cutting business taxes will place them at a competitive disadvantage vis-à-vis tax-cutting states are misplaced.  As Delaware Governor Jack Markell recently wrote after visiting hundreds of businesses:  “The number of business leaders who asked me to lower their taxes can be counted on one hand. . . .   What I hear most from business leaders is that they want the government to continue to improve our schools, reduce the time it takes to issue permits and licenses, enhance our transportation infrastructure, protect our arts community, strengthen linkages between our institutions of higher education and local companies. . . .  We’ve never succeeded as a country by racing to the bottom…. Now’s not the time to start.”

Cutting Film Subsidies — A Smart Call from New Mexico’s Governor

January 12, 2011 at 3:16 pm

Monday’s proposal from Susana Martinez, New Mexico’s newly elected Republican governor, to cut the state’s tax credit for film and TV productions by 40 percent is a smart move.  It’s also noteworthy because New Mexico started the wave of these state subsidies that has swept the nation over the past decade.  As I explained in an earlier report, those subsidies — which more than 40 states now offer — create too few good jobs for state residents at much too large an expense to state taxpayers, especially at a time of large budget shortfalls.

New Mexico’s film tax credit cost the state $67 million in fiscal year 2010, siphoning away funds from important public services, including education, public safety, health care, and infrastructure.

In related news, the Massachusetts Department of Revenue released its annual update of the most thorough study to date of a state’s film tax subsidy.  It shows that the state’s subsidy is even more wasteful than previously thought.  The report shows that:

  • In 2009, the cost to Massachusetts for every full-time equivalent job filled by a resident and created by its film tax subsidy was $325,000.
  • For every dollar of film subsidy that the state doled out in 2009, it received only 13 cents in return in revenues generated by economic activity that the subsidy induced.

State policymakers looking to close the continuing gap between weak revenues and rising needs should follow Governor Martinez’s example and limit — or, better yet, eliminate — these inefficient subsidies.